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2. Taxes and welfare the market for mountain bikes. The following graph shows the demand and supply for mountain bikes before the government imposes amy taxes First, use the black point (plus symbol) to indicate the equiibrium price and quantity of mountain bikes in the absence of a tax. Then use the green point (trlangle symbol) to shade the area representing total consumer surplus(CS) at the equilibnium price. Next, use the purple point (aiamond symbol) to shade the area representing total producer surplus (PS) at the equilibrium price. Before Tax Deman Consumer Surplus Producer Sups Supply 20 180 24 30060 4200 40 00 QUANTITY(Bikes s bikes. The black ine on the farowing graph shoms the tax wedge created by a tas of $80 Suppose the government imposes an excise tax on mountan per bke 58b4
(triangle symbal)8 (dash symbols) to shade the area representing tax revenue. Next use the green point area representing total consumer surplus after the tax. Then, use the purple point (damond symbol) to shade the area representing total producer surplus after the tax, inalily use the black point (olus symbol) to shade the area representing deadweight loss Demand Tax Revenue Consumer Surplus Producer Surplus Supply Deadwight Loss QUANTITY (BAS Complete the following table by using the previous graphs to determine the values of consumer and producer surplus Defore the tax, and consumer urp producer surplus, tax revene, and deadweight loss after the tax Note You can determine the areas of different portions of the graph by se ecting the reieant area Before Tax After Tax
120 Tax Wedge Consumer Surplus Producer Surplus Supply Deadweigh Loss 00 120 420 480 so 600 262 200 QUANTITY (Bikes) Complete the following table by using the previous graphs to determine the values of consumer and surplus, producer surplus, tax revenue, and deadweight loss after the tax Note: You can determine the areas of aifferent portions of the graph by selecting the relevant pertions of the graph by selecting th relevant area After Tax Before Tax (Dollars) (Dollars) Consumer Surplus Producer Surplus Tax Revenue Deadweight Loss
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The market is considered to be the most efficient when it attains equilibrium. The market is said to be in equilibrium when the market demand is equal to the market supply. The quantity at which the market demand equals the market supply is called thc cquilibrium quantity and the pricc at which thc market demand cquals supply is known as the equilbrum price. The equilbrium condition is considered to be one of the efficient conditions of the market since at the equilibrium of demand and supply, the marginal benefit to the consumers equals the marginal cost faced by the producers 200 1 80 Demand 160 140 S-MC Consumers surplus Price Producers surplus (dollar per bike)100 80 60 40 20 Supply MB Quantity Bikes) Before the imposition of tax the market is in equilibrium with 240 bikes demanded and supplied at a price of S120 per bike. Here the quantity demanded is exactly cqual to the quantity supplied and hence the market is in cquilibrium. The consumer surplus is the extra benefit enjoyed by a consumer while he purchases a commodity. It is the additional benefit enjoyed by consumers who pay less than they are willing and able to pay for a good. It is the difference between what actually a consumer is paying for a commodity and what actually he is willing to pay for a commodityThe area below the demand curve and above the equilibrium price is the consumer surplus. For 240 quantities of bikes the consumers are willing to pay $180. But they actually get the bike at S120. Hence the difference between the consumer actually willing to pay and actually the consumer paid is the consumers surplus ($180-S120 $60) The producers surplus is the extra benefit that the producers enjoyed from the sale of a product. In other words the additional bencfit enjoyed by producers who arc able to sell for a price higher than they would have been willing to sell for. The area below the equilibrium price line and the area above the supply curve represent the producers surplus 200 180 Demand 160C 140 A 120 S MC Price (dollar per bike)100B 80 60 40 D/ Supply 20 MB Quantity(Bikes) Before the imposition of tax by the government the market price of the bike was S120. But the imposition of tax raises the market price of bike into S140. This priceincrease consequent on the imposition of tax reduce both consumers surplus, producers surplus and deadweight loss the entire society due to fall in production of bike. Deadweight loss is the loss of satisfaction due to inefficient operation of the market. The imposition of tax incrcases the price of the commodity which again reduce the demand and supply. Thus the loss of satisfaction due to fall in consumption and production is the deadweight loss to the entire society Consumers surplus Before tax(dollarsAfter tax(dollars S60($180- S120)area C+A C only. A goes to $40( $ 1 80-$ 140)are government as tax revenue Producers surplus S100($120-$20)the $40( $60-$20) the area D only. B goes to area B+D overnment as tax $80($140-$60) Area EIF ax revenue Deadweight loss0

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